Forex Investment and Currency Trading

The US government announced a USD17.4bn rescue package for the automakers, which is allowing the Detroit Big 3 to avoid bankruptcy. GM and Chrysler will get USD13.4bn in emergency government loans in exchange for restructuring, and another USD4bn will likely be available to GM in February. There has been a modest positive reaction to this news with most Asian equity market indices trading higher and the JPY crosses trading higher. Reports of troubled Irish banks receiving a EUR7bn bailout appears to be having little impact on FX markets and EUR strength so far.

The shortened week and potentially low trading volumes could see G10 exchange rates get stuck in ranges. There are still some important events to keep the FX market on its toes, however. The most important is likely to be ECB President Trichet’s speech on Tuesday, with the FX market likely to focus on any comments about the recent sharp strengthening in the EUR.

US GDP, Michigan consumer sentiment and home sales data are all released Tuesday. US consumer durable good orders data released Wednesday are expected by the market to show a decline in orders of 3.0% m/m in November. Weak US economic data could potentially weigh upon the USD although given how much bad news is priced in, the data would have to be much softer than expected to have an impact.

According to our financial fair value model, the 9.5% rise in EUR/USD over the past two weeks has been not been matched by the 3.6% rise in our estimate of fair value. Poor liquidity conditions appear to have exacerbated the appreciation in the euro and we continue to think that the huge gains over the past two weeks are not sustainable as valuation is becoming increasingly stretched. We also expect the ECB to adopt a more dovish stance, potentially even cutting rates in January.